March 24 (Bloomberg) -- The European Union’s plan to create a permanent financial support mechanism for countries sharing the euro lacks features that would help fight crisis contagion to Spain, said Jacques Cailloux, chief economist at Royal Bank of Scotland Plc.
Portugal moved closer to having to seek an aid package after Prime Minister Jose Socrates’s offer to resign left his government in limbo on the eve of today’s European Union summit to address the region’s debt crisis. Two-year Portuguese bond yields reached the highest since 1999.
The Portuguese political wrangling comes as European leaders are gathering in Brussels to hash out a lasting way of dealing with countries whose finances have become unsustainable. Finance ministers agreed on March 21 to create a permanent 500 billion-euro ($627 billion) rescue fund as of 2013.
“It happens in a week where Europe is due to announce one of the biggest policy responses yet” to the sovereign-debt crisis, Cailloux said in an interview on Bloomberg Television’s “In the Loop.” “The problem we’ve got is that the toolkit is still not adequate to get rid of this contagion that can come back at any point in time.”
RBS estimates that Portugal will end up taking aid of about 80 billion euros.
Fitch Ratings today cut Portugal’s long-term foreign and local currency issuer default ratings to A- from A+ and short-term issuer default ratings to F2 from F1. The ratings were placed on rating watch negative.
In neighboring Spain, 30 banks had their senior debt and deposit ratings downgraded today as Moody’s Investors Service reviews whether governments are willing to support their lenders.
“Spain has held up very well since beginning of the year and somewhat decoupled from Portugal so it’s been encouraging to see that the Spanish bond market held up very well,” Cailloux said. “At the same time, there are still major uncertainties that Spain is facing.”
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